Steffy: Congress takes a swipe at small banks

By Loren Steffy |
June 11, 2010

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James Tuggle is in favor of financial reform, but he's worried about the details of the bill being discussed in Congress this week.

As the CEO of Transtar Federal Credit Union in northwest Houston, he thought the reform bill would bring the big banks to heel. But he says an amendment that was slipped into the Senate version and passed last month could hurt his credit union and other small financial institutions.

Tuggle went to Washington this week to lobby against the provision, making him a wary ally of the large banks.

If you use a debit card, you probably aren't aware of swipe fees. The costs of electronic payment are borne by merchants.

That, after all, is how it should be. While electronic payments are a convenience for consumers, they're a benefit for merchants. They offer rapid and guaranteed payment. Consider the alternative: Before debit cards, we wrote checks. More than 500 million checks are forged annually in the U.S., and losses top $10 billion, according to AP Technology, a California company that specializes in secure banking.

When merchants are slipped bad checks, they bear the loss. With debits, the banks guarantee payment.

But as the volume of electronic transactions has grown, so has retailers' costs. Small-business owners say swipe fees cost them $48 billion a year, according to the Merchant Payments Coalition, a retailer group.

The fees, they say, are far higher than the cost of actually processing a transaction.

Debit transactions accounted for more than $2 trillion last year, about an 8 percent increase from 2008, according to the Nilson Report, which tracks consumer payment systems. The swipe fees, which average 1 percent of each transaction, represent about $10 billion annually for card issuers.

For several years, retailers have lobbied to reduce interchange fees. That's what the amendment in the Senate bill, added by Sen. Richard Durbin, D-Ill., is designed to do. What's more, the language exempts small credit unions like Transtar and community banks.

So why are they opposed to the changes?

For big banks, debit card businesses can be a profit center, but for smaller institutions, they're at best a break-even service for customers. The Senate amendment would lower those fees for larger banks, and that may leave small institutions with a difficult choice. Because they're exempt, they could continue charging higher fees, or they could accept lower ones and be forced to pass some of the costs onto customers, Tuggle said.

Either way, Tuggle fears Transtar would have difficulty keeping its 7,000 members or attracting new ones without offering a debit card for checking accounts, Tuggle said.

“Small credit unions and banks would be put at a competitive disadvantage,” he said. “If I want to keep my debit card program, I can either operate it at a loss or pass that on to consumers.”

If credit union customers have to pay every time they use their debit card, they're likely to switch their account to a larger institution, he argued.

The Senate amendment would allow retailers to offer discounts for certain card brands, such as those from larger issuers that have lower fees, said Winter Prosapio, spokeswoman for the Texas Credit Union League.

At the moment, lawmakers are attempting to hammer out a compromise bill. The House version has no mention of interchange fees, and it's unclear if the Senate provision will survive.

But one thing is clear: This isn't the place to take up the issue. Financial reform was designed to address the egregious practices of banks that contributed to the financial crisis. Swipe fees weren't part of that problem.

“They should punish the right people,” Tuggle said. “We're the ones who are going to get punished for this.”

Swipe fees may indeed need to be changed, but it's a complicated issue that needs to be considered in its own right, not as an afterthought to an already-mammoth reform bill.